This morning, the latest Chicago PMI report revealed that regional manufacturing activity raced higher in January. The index lept to 55.6 from last month’s 50.0 reading. Economists were only looking for a 50.5 level on the index.
The best number in the report, though, wasn’t the headline index – it was the employment sub-component, which surged to 58.0 from last month’s reading of 46.8 – the largest gain since February 2002.
(Any reading above 50 on the index indicates expansion, so the employment situation suddenly shifted from deterioration in December to robust expansion in January).
Miller Tabak’s Chief Economic Strategist Andrew Wilkinson writes in a note to clients, “We also sense that if payrolls were unrestrained by the fiscal cliff at year’s end, employers will put their best foot forward to start 2013 – resolution or not on the spending front.”
Wilkinson says that means we’re likely to see a nonfarm payrolls print in excess of consensus estimates (which currently predict 165,000 payrolls added) when tomorrow’s jobs report is released at 8:30 AM ET.
The table below shows the last five instances where the employment sub-component of Chicago PMI increased more than five points in consecutive months (today’s increase was 11.2 points).
Each time, save for September 2008, when the global financial system went into meltdown, nonfarm payrolls ended up much better than consensus estimates predicted – albeit after revisions in the case of January 2010.
Photo: Miller Tabak
Concentrating on the most recent three lines in the table, our observation shows that on those occasions when the Chicago employment index advanced by more than five points, payrolls beat forecasts at the time between 17-43,000. And better still, after revisions were made, the minimum beat relative to consensus was 49,000 and as much as 142,000.
On account of the revisions to the data, we might not expect to see instant gratification from this observation in the January report. However, even a minimum beat of 17,000 is about in-line with our 180,000 prediction. But we might have to wait for several months before watching this jump to around 225,000 if the revision rules hold true.
Of course, the tiny sample size here means there’s no way to conclude whether the relationship is statistically significant. However, if recent relationships hold up, that big boost in employment in today’s Chicago PMI could be a very good sign for tomorrow’s report.